South Korean financial regulators are cracking down on unauthorized cryptocurrency funds. In particular, one crypto fund launched by a local exchange is reportedly being investigated. The exchange claims no wrongdoing as its token activities were carried out overseas, but has promptly canceled its plan to launch a second fund.

Unauthorized Crypto Funds

South Korea’s Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have warned investors of unauthorized cryptocurrency funds. The warning followed the launch of a financial product where “cryptocurrencies collected from some investors are managed through initial coin offerings (ICO), and profits are distributed at their expiration dates,” Business Korea described.

The regulators specifically referred to the fund launched last month by crypto exchange Zeniex called “ZXG Crypto Fund No. 1,” which is “the first virtual currency fund in Korea,” the publication detailed, noting:

The virtual currency fund has never been registered with the Financial Supervisory Service … None of the management company, sales company and the trustee have been approved by the Financial Services Commission.

Maeil business newspaper reported on Tuesday that “The financial authorities have handed over the circumstantial data for the investigation to the prosecution.”

Zeniex explained that while funding was made through its platform, “the actual recruitment and token issuance were made by overseas management companies,” the news outlet conveyed. Noting that less than 1 billion won ($878,080) has been raised, the company believes that there was no reporting obligation. An official of the exchange was quoted asserting:

An indirect investment in a virtual currency fund is an attractive tool to raise market soundness … It’s unfortunate that innovative attempts will not continue until the government’s guidelines are set.

The South Korean government banned ICOs in September last year but has yet to introduce guidelines for them. A number of proposals have been submitted to the National Assembly and the government is expected to announce its ICO stance in November.

Zeniex’s Funds and Capital Markets Law

Business Korea explained that under the Korean Capital Markets Act, all investment funds must be registered with the FSS.

In addition, “Public offering funds that collect funds from general investors must file securities reports,” and “an asset management company that manages a fund and the fund sales company that sells it have to obtain necessary financial approval,” the publication detailed.

The company must also “honor regulations on business practices such as the maintenance of minimum capital for soundness and the prevention of conflicts of interest and [has] a duty to explain to investors.”

As for Zeniex’s fund, an FSS official was quoted by Maeil saying, “It is the interpretation of the authorities that the fund must follow the investor protection system set out in the capital markets law as long as it is sold to domestic financial consumers.” However, the official admitted:

There is no way to check whether the platform is operating as claimed by Zeniex, because the financial authorities have no regulatory authority at present.

Zeniex had planned to launch its second fund this month. However, the company issued a statement on Monday stating that “The authorities are concerned that there is room for illegality,” adding that it “will completely cancel the launch of the second product because it could lead to misunderstandings of investors and regulators.” Local media then reported on Tuesday that Zeniex has canceled the launch of its second fund.

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